My Kansas house was only half-built on January 1 -- is the lot still taxed as vacant land?

Plain-English summary

Kansas values property as it stands on January 1. So what happens to a lot where a house is half-framed on that date — is it still a vacant lot, or is it a house?

The directive answers both halves of that question. On value: "As a general rule, such property shall be valued at fair market value as of January 1st, the assessment date." On classification: "if there is added value attributable to the construction in progress on January 1st, the property shall be classified based upon its intended use, and not as a vacant lot."

There is no grace period for unfinished work. "A county appraiser may not, by law, exempt or ignore any added market value attributable to real property under construction," and the directive grounds that in the statutory scheme: K.S.A. 79-101 "requires all property, not expressly exempt from taxation, to be valued," and K.S.A. 79-501 requires property to be valued at fair market value, with carve-outs only for personal property valued under K.S.A. 79-1439 and agricultural land valued under K.S.A. 79-1476.

The measure of value is the ordinary one. K.S.A. 79-503a "defines fair market value as the amount in terms of money that a well informed buyer is justified in paying and a well informed seller is justified in accepting for property in an open and competitive market, assuming that the parties are acting without undue compulsion."

The trigger for reclassification is added value, not completion. The directive instructs that "the county appraiser shall not classify real property as a vacant lot if the county appraiser determines that there is added value attributable to the construction in progress on January 1st." It reaches that through the meaning of "improvement," which it takes from a dictionary definition: an improvement is "[a] valuable addition. . ." as defined by Black's Law Dictionary. From that: "the first January 1 that the improvement adds value to the overall market value of the real property, the property can no longer be considered a vacant lot for classification purposes."

So a partially built structure that has begun to add market value moves the parcel out of the vacant-lot category — and into the category matching what it is being built to become: "the property shall be classified based upon the intended use as of January 1st."

Finally, the directive closes off the exemption argument and specifies the method: "No statute expressly exempts property under construction from taxation; therefore, the county appraiser shall determine the fair market value and the classification of property under construction as of January 1st, from actual view and inspection and enter such value and classification on the appraisal rolls."

What this means for you

Homeowners building a house

Expect your assessment to move before you move in. Once construction has added value as of a January 1, the parcel is no longer valued and classified as a vacant lot, and it will be classified by what the house is intended to be — residential — rather than by its unfinished state.

The value should still be fair market value of what actually exists on January 1, not the value of the finished house. A partially complete structure is worth what a willing buyer would pay for a partially complete structure.

Developers and builders holding lots

Timing matters more than percentage complete. A lot where work began in November is assessed differently on January 1 than one where work begins in February. Track which parcels had value-adding work in progress at year end.

Anyone appealing a construction-in-progress value

Two distinct arguments live here, and they are worth keeping separate. The first is classification: did the construction actually add value to the overall market value as of January 1? If not, the vacant-lot classification stands under the directive's own test. The second is amount: even where reclassification is correct, the value must be the fair market value of the property as it stood on January 1, determined "from actual view and inspection."

Owners of business machinery under construction

Different rule, different directive. Commercial and industrial machinery and equipment under construction is addressed by companion Directive #98-032, which turns on the constitutional formula for that property class rather than on the vacant-lot question. Do not apply this directive's reasoning to that property.

Common questions

Q: My house was only partly built on January 1. Is the lot still taxed as vacant?
A: Not if the construction added value. "The county appraiser shall not classify real property as a vacant lot if the county appraiser determines that there is added value attributable to the construction in progress on January 1st."

Q: Is unfinished construction exempt?
A: No. "No statute expressly exempts property under construction from taxation."

Q: Will I be taxed on the finished value before the house is done?
A: The standard is fair market value as of January 1 — what a well informed buyer is justified in paying for the property in its January 1 condition, determined from actual view and inspection.

Q: What classification does it get?
A: Its intended use as of January 1 — what the structure is being built to be — rather than the vacant-lot classification.

Q: What exactly triggers the change?
A: Added value. "The first January 1 that the improvement adds value to the overall market value of the real property, the property can no longer be considered a vacant lot for classification purposes."

Q: Where does the "added value" idea come from?
A: The directive relies on the definition of an improvement as "[a] valuable addition. . ." from Black's Law Dictionary.

Q: Does the appraiser have to come look?
A: The directive says the value and classification are determined "from actual view and inspection" and entered on the appraisal rolls.

Q: Does this cover machinery and equipment under construction?
A: No — that is companion Directive #98-032, which applies a different analysis.

Citations and references

Authority for the directive: K.S.A. 79-505.

Statutory scheme relied on:

• K.S.A. 79-101 — all property not expressly exempt from taxation must be valued
• K.S.A. 79-501 — property valued at fair market value, except personal property valued under K.S.A. 79-1439 and land devoted to agricultural use valued under K.S.A. 79-1476
• K.S.A. 79-503a — definition of fair market value
• K.S.A. 79-1439; K.S.A. 79-1476 — the two exceptions named in K.S.A. 79-501

Non-statutory source quoted: Black's Law Dictionary, definition of "improvement" as "[a] valuable addition. . ." (quoted in the directive with its ellipsis).

Companion directive: #98-032, classification and valuation of commercial and industrial machinery and equipment under construction.

Source

• Landing page: Kansas Property Tax Directives
• Original PDF: PVD Directive 98-031

Original ruling text

State of Kansas
Kansas Department of Revenue
Division of Property Valuation

The following appraisal directive is adopted by the director of property valuation pursuant
to K.S.A. 79-505:

DIRECTIVE #98-031: Classification and valuation of real property under construction.

A question has arisen as to how real property that was a vacant lot, but has construction in
progress taking place on January 1st, should be valued and classified for property tax
purposes. As a general rule, such property shall be valued at fair market value as of
January 1st, the assessment date. Furthermore, if there is added value attributable to the
construction in progress on January 1st, the property shall be classified based upon its
intended use, and not as a vacant lot.

Land and improvements shall be valued at fair market value as of January 1st. A county
appraiser may not, by law, exempt or ignore any added market value attributable to real
property under construction. K.S.A. 79-101 requires all property, not expressly exempt
from taxation, to be valued. K.S.A. 79-501 requires property, except personal property
valued pursuant to K.S.A. 79-1439 and land devoted to agricultural use valued pursuant
to K.S.A. 79-1476, to be valued at fair market value. K.S.A. 79-503a defines fair market
value as the amount in terms of money that a well informed buyer is justified in paying
and a well informed seller is justified in accepting for property in an open and
competitive market, assuming that the parties are acting without undue compulsion.

The county appraiser shall not classify real property as a vacant lot if the county appraiser
determines that there is added value attributable to the construction in progress on
January 1st. An “improvement” is defined by Black’s Law Dictionary as “[a] valuable
addition. . .” Therefore, the first January 1 that the improvement adds value to the
overall market value of the real property, the property can no longer be considered a
vacant lot for classification purposes. Under these circumstances, the property shall be
classified based upon the intended use as of January 1st.

No statute expressly exempts property under construction from taxation; therefore, the
county appraiser shall determine the fair market value and the classification of property
under construction as of January 1st, from actual view and inspection and enter such value
and classification on the appraisal rolls.

APPROVED: June 12, 1998

Mark S. Beck
Director of Property Valuation